Shares of brokerage companies such as TD Ameritrade (NASDAQ:AMTD) fell hard Oct. 1 on the back of news that Charles Schwab (NYSE:SCHW) will bring commission-free trading to retail investors. AMTD stock has been in a notable down-trend since the summer of 2018, and the latest dive now has it severely oversold in the near term. A relief bounce could be in the cards.
Just like most other industries, the finance industry and, in this case, the brokerage firms have continuously adapted their business models over the years. To wit, the trend in lowering trading commissions has been well intact for years and thus to plenty of analysts the arrival or zero-commissions trading comes to no great surprise. These companies have found other ways to make money (asset management, interest on deposits, etc.) and in my eye, the lure of zero-commissions trading may indeed bring more clients to those firms.
In other words, while yesterday’s reaction on the part of investors was undeniably bearish, I think these companies will find ways to more than make up for the loss in trading commission fees.
AMTD Stock Charts
To gain some perspective, however, on the price action of AMTD stock, let’s have a look at the multi-year chart first. A technical pattern that I often show to clients is the so-called megaphone pattern (displayed on the longer-term chart). As the idea of mean-reversion is a very real thing in markets, when an asset reaches the upper end of its trend, it does ultimately have a good chance of mean-reverting lower. In the case of a megaphone pattern, however, that mean-reversion lower can be a massive move.
Indeed, after once again reaching the upper end of the pattern in early 2018, AMTD has pushed lower again over time and as a result of the selling on Oct. 1, it has now reached the lower end of the pattern. On the weekly MACD momentum oscillator reading, we can see that the stock is now also well oversold.
On the daily chart, we can draw a similar megaphone pattern type, but now, instead of pointing up, this pattern is pointing down. Yesterday’s big selloff has pushed AMTD stock to the lower end of the pattern. Here, the RSI trend indicator is plenty oversold and all of this could lead to an oversold bounce soon.
It is noteworthy that TD Ameritrade is set to report its next batch of earnings on Oct. 21. Given the sharp decline on Oct. 1 and because I don’t want to try to catch a falling knife, I want to keep this trade small in size. One could look to buy AMTD stock around the $34.50 mark with a first upside target at $38 and using a stop loss at $32.50. If it reaches that point and the stock gives us a notable bullish reversal, one could try the trade again. Options traders may look to the January 2020 options where selling the 33-30 bull put spread is an alternative worth considering in my eye.
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